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EIGA February 2020 Monthly Report & Update

Overview
  • February started in a positive manner, with global markets rallying on the view the Coronavirus impact would be short-lived. However, the increasing number of cases outside China saw markets sold off heavily in the final week of the month.
  • The Australian market followed the same pattern, finishing the month down -7.8%. The Coronavirus-induced concerns overshadowed the impacts of reporting season, which had seen the market be up +2.0% prior to the sell-off, as many stocks reported profit results which were well-received by the market.
  • The major banks outperformed while the resources sector lagged.
  • The Fund continues to target a pre-tax distribution yield for FY20 of around 7.0%.
Performance
Month (%)Quarter (%)FYTD (%)1 Year (% p.a.)Since Inception* (%)
Income Distribution0.41.33.411.48.3
Capital Growth-9.3-9.3-8.5-11.8-6.6
Total Return-8.8-8.0-5.1-0.41.7
Franking Credits*0.30.51.65.33.7
Income Distribution including Franking Credits0.71.84.916.712.0
Benchmark Yield* Franking Credits0.70.93.45.76.0
Excess Income to Benchmark*0.00.91.511.06.0

^Since inception May 2018. EIGA returns are calculated using net asset value per unit at the start and end of the specified period and do not reflect the brokerage or the bid ask spread that investors incur when buying and selling units on the ASX. Benchmark yield is calculated based on the difference between the return of the S&P/ASX300 Franking Credit Adjusted Daily Total Return Index (Tax Exempt) and return of the S&P/ASX300 Index. #Franking credits are an estimate only as tax components will only be known with certainty at the end of the financial year. Past performance is not a reliable indicator of future performance.

Distribution

The EIGA distribution for February 2020 was of 1.72 cents per unit.

Have you thought about reinvesting your distributions? If you don’t rely on the cash payment of distributions every month it might be worth considering reinvesting them so your invested capital can build and grow through the DRP Plan. You can do this by logging onto your Link account or emailing [email protected] or call 1300 554 474.

EIGA Review

February started in a positive manner, with global markets rallying on the view that the Coronavirus impact would be short-lived. However, the increasing number of cases outside China saw markets sold off heavily in the final week of the month, with the S&P500 -8.4%, FTSE100 -9.7%, Nikkei225 -8.9% and Shanghai Composite -3.2%.

The Australian market followed the same pattern, finishing the month down -7.8%. All sectors of the market delivered negative returns, however the flight to safety saw defensive sectors such as Healthcare (-4.0%), Utilities (-4.0%) and REITs (-4.7%) outperform, while more cyclical sectors such as Metals and Mining (-11.7%) and Energy (-17.4%) lagged on the expectations of lower commodities demand.

The Coronavirus-induced concerns overshadowed the impacts of reporting season, which had seen the market be up +2.0%, as many stocks reported profit results which were well-received by the market. Given the relatively subdued economic backdrop, expectations were low ahead of the reporting season. However, many companies are still performing well. The major banks, for example, outperformed after CBA – a bellwether for the banking sector and broader domestic economy – reported a solid result showing, amongst other things, that credit quality remains very strong. Results from the retailers also showed that consumer spending was better than feared. Strong cash flows and dividends from the major resources companies was another highlight of the reporting season.

The major banks outperformed (down an average of only -3.5%) while our resources and tourism-exposed holdings lagged due to the expected impact of the Coronavirus.

EIGA Activity

During the month, we took profits and exited our holding on Coca-Cola Amatil and trimmed holdings in the banks and Macquarie Group. Proceeds were used to increased holdings in a number of stocks which had been sold down, including adding Fortescue Metals to the portfolio.

At month end, stock numbers were 33 and cash was 6.3%.

Distribution

In order to provide a regular income stream, the Fund pays monthly distributions.  We aim to pay equal cash distributions each month, based on our estimate of the dividend income to be generated over the year. Franking credits, surplus income and any realised capital gains will then be distributed, as per usual, with the June distribution.

The Fund declared a distribution for January of 1.72cpu, bringing the total income return for the last 12 months to 48.1cpu. This represents an income yield for the last 12 months of 11.4% or 16.7% including franking credits.

The distribution yield over the past 12 months was boosted as a result of the Fund participating in a number of off-market buy-backs. This is not expected to be repeated in the current year.

For the FY20 financial year, we are targeting a 7.0% distribution yield, comprising a 5.0% cash yield plus 2.0% in franking credits.

Outlook

The current level of uncertainty regarding the impact of the Coronavirus outbreak is very high. However, what is certain, is that it will pass. Further, before this issue arose, the global economic outlook was increasingly positive, with easing trade tensions and ongoing low interest rates seeing activity picking up in most regions. It is also important to note that this sell-off is due to an external issue, rather than being due to some fundamental economic or market imbalance.

As a result, markets may well rally violently as signs emerge that the spread of the disease is slowing. However, should it prove to be prolonged, we are likely to see significant policy responses from governments and central banks to support their economies through this period, via a combination of fiscal stimulus and monetary policy.

EIGA continues to offer a higher forecast gross yield than the overall market and, as always, our focus will continue to be on investing in quality companies which are offering attractive valuations  and have the ability to deliver high levels of franked dividend income to investors. Further, we believe the current very low interest rates highlight the relative attractiveness of financially-sound, high  dividend yielding equities.

To read more about eInvest Income Generator Fund (Managed Fund) ASX: EIGA, click here.

Past performance is not a reliable indicator of future performance. Please read the PDS prior to investing. This information is general in nature and is subject to the terms and conditions outlined here.